GE 2010 Annual Report Download - page 61

management’s discussion and analsis
GE 2010 ANNUAL REPORT 59
Variable Interest Entities
We securitize financial assets and arrange other forms of asset-
backed financing in the ordinary course of business to improve
shareowner returns and as an alternative source of funding. The
securitization transactions we engage in are similar to those
used by many financial institutions.
The assets we securitize include: receivables secured by equip-
ment, commercial real estate, credit card receivables, floorplan
inventory receivables, GE trade receivables and other assets
originated and underwritten by us in the ordinary course of
business. The securitizations are funded with asset-backed com-
mer cial paper and term debt. Our securitization activities prior
to January 1, 2010 used QSPEs and were therefore not required
to be consolidated.
On January 1, 2010, we adopted ASU 2009-16 & 17. ASU 2009-16
eliminated the QSPE concept, and ASU 2009-17 required that all
such entities be evaluated for consolidation as variable interest
entities (VIEs). Adoption of these amendments resulted in the
consolidation of all of our sponsored QSPEs. In addition, we con-
solidated assets of VIEs related to direct investments in entities
that hold loans and fixed income securities, a media joint venture
and a small number of companies to which we have extended
loans in the ordinary course of business and subsequently were
subject to a TDR.
Substantially all of our securitization VIEs are consolidated
because we are considered to be the primary beneficiary of the
entity. Our interests in other VIEs for which we are not the primary
beneficiary and QSPEs are accounted for as investment securities,
financing receivables or equity method investments depending
on the nature of our involvement.
We consolidated the assets and liabilities of these entities at
amounts at which they would have been reported in our financial
statements had we always consolidated them. We also decon-
solidated certain entities where we did not meet the definition
of the primary beneficiary under the revised guidance; however,
the effect was insignificant at January 1, 2010. The incremental
effect on total assets and liabilities, net of our retained interests,
was an increase of $31.1 billion and $33.0 billion, respectively, at
January 1, 2010. The net reduction of total equity (including non-
controlling interests) was $1.9 billion at January 1, 2010, principally
related to the reversal of previously recognized securitization
gains as a cumulative effect adjustment to retained earnings.
At December 31, 2010, consolidated variable interest entity
assets and liabilities were $50.7 billion and $38.3 billion, respec-
tively, an increase of $33.7 billion and $23.1 billion from 2009,
respectively. Assets held by these entities are of equivalent
credit quality to our on-book assets. We monitor the under-
lying credit quality in accordance with our role as servicer and
apply rigorous controls to the execution of securitization trans-
actions. With the exception of credit and liquidity support
discussed below, investors in these entities have recourse only
to the underlying assets.
At December 31, 2009, prior to the effective date of ASU 2009-
16 & 17, our Statement of Financial Position included $11.8 billion
in retained interests in these entities related to the transferred
financial assets discussed above. These retained interests took
two forms: (1) sellers’ interests, which were classified as financing
receivables, and (2) subordinated interests, designed to provide
credit enhancement to senior interests, which were classified as
investment securities. The carrying value of our retained interests
classified as financing receivables was $3.0 billion at December 31,
2009. The carrying value of our retained interests classified as
investment securities was $8.8 billion at December 31, 2009.
At December 31, 2010, investments in unconsolidated VIEs,
including our noncontrolling interest in PTL and investments in
real estate entities, were $12.6 billion, an increase of $2.9 billion
from 2009, primarily related to $1.7 billion of investments in enti-
ties whose status as a VIE changed upon adoption of ASU 2009-17
and $1.2 billion of additional investment in pre-existing unconsoli-
dated VIEs. In addition to our existing investments, we have
contractual obligations to fund additional investments in the
unconsolidated VIEs of $2.0 billion, an increase of $0.6 billion
from 2009.
We are party to various credit enhancement positions with
securitization entities, including liquidity and credit support
agreements and guarantee and reimbursement contracts, and
have provided our best estimate of the fair value of estimated
losses on such positions. The estimate of fair value is based on
prevailing market conditions at December 31, 2010. Should mar-
ket conditions deteriorate, actual losses could be higher. Our
exposure to loss under such agreements was limited to $0.9 bil-
lion at December 31, 2010.
We do not have implicit support arrangements with any VIE or
QSPE. We did not provide non-contractual support for previously
transferred financing receivables to any VIE or QSPE in either 2010
or 2009.
Critical Accounting Estimates
Accounting estimates and assumptions discussed in this section
are those that we consider to be the most critical to an under-
standing of our financial statements because they involve
significant judgments and uncertainties. Many of these estimates
include determining fair value. All of these estimates reflect our
best judgment about current, and for some estimates future,
economic and market conditions and their effects based on
information available as of the date of these financial statements.
If these conditions change from those expected, it is reasonably
possible that the judgments and estimates described below
could change, which may result in future impairments of invest-
ment securities, goodwill, intangibles and long-lived assets,
incremental losses on financing receivables, increases in reserves
for contingencies, establishment of valuation allowances on
deferred tax assets and increased tax liabilities, among other
effects. Also see Note 1, Summary of Significant Accounting
Policies, which discusses the significant accounting policies
that we have selected from acceptable alternatives.
LOSSES ON FINANCING RECEIVABLES are recognized when they
are incurred, which requires us to make our best estimate of
probable losses inherent in the portfolio. The method for calcu-
lating the best estimate of losses depends on the size, type and